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ABSTRACT

The study investigated the impact of oil Foreign Direct Investment (FDI) on Economic Growth in Nigeria. Real gross domestic product was used as the indices for economic growth and the dependent variable, while oil foreign direct investment, interest rate and exchange rate as explanatory variables, the study examine the effect that oil Foreign Direct Investment (FDI) had on Real Gross Domestic product. The regression model was used to analyse the data for a ten-year period of oil FDI. Result showed that Foreign Direct Investment (FDI) in the oil sector accounted for significant growth in Nigerian economy for the period under study. Findings further indicated a significant relationship of the country’s exchange rate and economic growth. It was concluded that there is a heavy reliance of the Nigerian economy on oil; therefore the need for the government to forge viable partnership in this sector in order to make sustainable contributions towards the diversification of business activities away from the oil sector.

THE IMPACT OF OIL FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH IN NIGERIA

By

George Nnenna Victoria

March 2011

PREFACE

The aim of this study is to examine the impact of foreign direct investment in the oil sector on the economic growth in Nigerian. Evidence in the Nigerian economy has shown that since the 1980’s some relationship exist between the stock of money and economic growth or economic activity. Over the years, Nigeria has been controlling her economy through variation in her stock of money. Consequent upon the effect of the collapse of oil price in 1981 and the B.O.P deficit experienced during this period, various methods of stabilization ranging from fiscal to monetary policies were used. Interest rates were fixed and these were said to be beneficial to big borrower farmers (Ojo 1989). Ikhide and Alawode (1993) while evaluating the effect of Structural Adjustment Programme (SAP) concluded that reducing money stock through increased interest rates would lower gross National product. Thus, the notion that stock of money varies with economic activities applies to the Nigerian economy (Laidler 1993). The output development and other economic growth process (via interest rate deregulation) in the Nigerian economy calls for considerable test of the validity of Friedman and Mieselman (1963) work on the Nigerian economy. The implication of the stability of the relationship between money and economic growth will show the effectiveness of monetary policy following the conventional Hicksian IS-LM analysis.

Interest rate reform, a policy under financial sector liberalisation, was to achieve efficiency in the financial sector and engendering financial deepening. In Nigeria, financial sector reforms began with the deregulation of interest rates in August 1987 (Ikhide and Alawode, 2001). Prior to this period, the financial system operated under financial regulation and interest rates were said to be repressed. According to McKinnon (1973) and Shaw (1973), financial repression arises mostly when a country imposes ceiling on deposit and lending nominal interest rates at a low level relative to inflation. The resulting low or negative interest rates discourage saving mobilisation and channelling of the mobilised savings through the financial system. This has a negative impact on the quantity and quality of investment and hence economic growth. Therefore, the expectation of interest rate reform was that it would encourage domestic savings and make loan able funds available in the banking institutions. But, the criticism has been that the “tunnel-like” structure of interest rate (Ojo, 1976) in Nigeria is capable of discouraging savings and retarding growth in view of the empirical link between savings, investment and economic growth. The critical question, therefore, is whether real interest rates have any positive effect on economic growth in Nigeria.

The present study will investigate the important role of foreign direct investment in the upstream sector on the economic development of Nigeria, and also, using the interest rate and exchange rates for the period under study as exploratory variables.

STATEMENT OF AUTHENTICITY

I have read the University Regulations relating to plagiarism and certify that this dissertation is all my own work and do not contain any unacknowledged work from any other sources.